Treasurys roar ahead 11-20-98

JulieRannazzisi

} Buying mostly in long maturities keep their poise By Julie Rannazzisi, CBS MarketWatch Last Update:

NEW YORK (CBSMW) -- Treasurys ended on a positive note Friday, maintaining their poise despite beefy gains in the stock market. Longer-dated Treasury issues saw slight selling Friday afternoon as the stock market roared ahead and players said it was a good sign that the selling was kept to a minimum.

The 30-year benchmark Treasury issue (TRE=Z3-GB) gained 11/32 to yield ($TYX)
TYX, +2.06%
5.22 percent while the 10-year (TRE=Z0-GB) was up 1/4 to yield ($TNX)
TNX, +1.73%
4.82 percent. The 2-year (TRE=Y2-GB) was up 1/32 to yield 4.646 percent. The 52-week bill (BIL=Y1-GB) was flat from Thursday at a discount rate of 4.34. The Dow Jones Industrial Average
DJIA, -0.67%
closed up 103.50 points, or 1.1 percent. See Market Snapshot.

Volume was light and traders said they expected little to no action next week. The bond market will see an early 2 p.m., ET, close on Wednesday and Friday and a full close Thursday for Thanksgiving. The data docket will be dry indeed with only second-tier releases set to hit the market. Players said their main focus will be on Tuesday's $16 billion 2-year note auction.

With short-dated issues underperforming so heavily in the past days, traders said the 2-year auction may be a hard sale. But others pointed out that prices if prices continue to retreat in the next couple of days, buyers may actually see some value in the issue.

One trader said buyers would be in if the 2-year's yield got closer to the fed funds rate target of 4 3/4 percent.

How flat can you get?

Players said the market has been trading in the same way for the past three sessions, with investors selling short maturities -- such as bills and 2-year notes -- and buying long-dated ones -- like 10-year notes and 30-year bonds. The benchmark 30-year also got a boost from overseas purchases, particularly from Japanese players.

The selling in short paper is taking place because of diminished market expectations of an ease going forward and that's producing a huge narrowing in spreads between the yield on the 30-year bond and 2-year note.

"The yield curve is getting flat like a pancake," exclaimed Patrick Dimick of Warburg Dillon Read.

On Tuesday, the spread between the 2-year and 30-year stood at around 74 basis points. That flattened to 63 basis points on Wednesday and then fell further to 58 basis points at the close Thursday. It's now at 54 basis points. Nobody likes the front end, particularly ahead of Tuesday's $16 billion 2-year note auction.

"There's a revised schedule for easing," Dimick said, adding that this was being factored into prices. "(It's a) curve capitulation trade."

Subdued, holiday-like trading ahead

Traders said they are preparing for typical holiday trading in the next month. Volume is expected to dry up substantially as Wall Street firms begin to close their books for the year.

"A lot of people are already squared up," a trader at a New York shop said.

Players said trades related to issuance in the corporate market -- which has seen a blistering pace of new issuance in the past three weeks -- may provide the market with some limited excitement next week.

The dollar's gains against the Japanese yen and German mark helped bolster Treasury prices Friday. Foreigners that own dollar-denominated assets like Treasurys see the value of their holdings increase when the greenback rises in value. Dollar/yen climbed to 120.35, up 0.4 percent from Thursday's levels, while dollar/mark rose 0.2 percent to 1.6905.

Japanese equities surged Friday on hopes that the economic fiscal stimulus package presented by the government this week would be extended to include consumption tax cuts. But Japan's Finance Minister Miyazawa later removed some of those expectations indicating that the cuts had not been agreed upon yet, fueling dollar gains.

In other news, Fed Chairman Alan Greenspan participated via video at a European Banking Conference taking place in Frankfurt. Greenspan did not mention monetary policy and spoke only about the Euro. The Chairman said the competitive interaction between the Euro and the dollar would be beneficial to both the U.S. and Europe.

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